This blog is created as a basis for class discussion. Posting are by the students of Competitive Strategy at the Graduate School of Business of the University of Chicago. Analysis and comments are written by students and do not necessarily reflect the views of Professor Garicano or the Graduate School of Business.

Monday, May 09, 2005

MLS expansion: Match winner or own goal?

This year Major League Soccer celebrates its 10th season. Unlike other professional sports leagues, MLS, operator of the top division soccer league in the US, owns all the teams in its league and sells the rights to operate them to investors. In its inaugural season in 1996 MLS boasted 10 teams in 2 conferences. In the Eastern Conference was Tampa Bay Mutiny (league owned for six years), D.C. United and New York New Jersey Metrostars (owned by AEG, a subsidiary of The Anschutz Corporation), Columbus Crew (owned by the Hunt family), and the New England Revolution (owned by Robert Kraft). The Western Conference consisted of the L.A. Galaxy, San Jose Clash, and Colorado Rapids (owned by AEG), Dallas Burn (league owned), and Kansas City Wizards (owned by the Hunt family). In 1998, MLS added two new teams; Miami Fusion in the Eastern conference and the Chicago Fire in the Western conference. However in 2002 MLS eliminated the Miami and Tampa Bay teams due to ownership problems. By the end of the 2004 season, MLS had a total attendance of 2,333,797 with an average of 15,559 and was looking to expand its numbers of teams again to 12. “After reiterating the league will expand by two teams in 2005, Commissioner Don Garber said, ‘Then we want to expand from 12 teams to 14 or 16 teams in the next four to six years. We want to be a 16-to-18-team league by 2010.’” So in 2005 MLS added two new teams to the Western conference, Real Salt Lake, owned by Dave Checketts, and Deportivo Chivas USA in LA, owned by Jorge Vergara Madrigal, while shifting Kansas City Wizards to the Eastern conference. After the difficulties faced by the Florida teams, MLS stipulated three criteria necessary to become an investor “owner” of an MLS team: an established ownership group willing to pay the league's $10 million expansion fee, a commitment to build a soccer-specific stadium within a reasonable timeframe, and a showing that the local community was willing to support soccer, evidenced by the sale of 7,500 season tickets. MLS also was said to prefer a large television market. The move to add SLC was questioned because of the small market and precarious stadium plans, but MLS approved the move possibly due to the city’s rank as the highest per-capita participation in soccer. Adding Deportivo Chivas USA to the LA market, though, was a somewhat controversial move. Not only did Chivas present the possibility of cannibalizing the LA soccer fan market, but for the first time in American sports history, a foreign-based club would buy an expansion franchise in a top-level U.S. pro league. Mexican billionaire Jorge Vergara, one of the most aggressive soccer entrepreneurs in this hemisphere, owns the controlling interest in Chivas de Guadalajara, a legendary club in Mexico. He put up the $10 million expansion fee to get into the US soccer market. MLS had to get Vergara to agree to league rules, such as those governing foreign-player limits and salary caps to minimize the possibility of the newest team becoming a farm league for the Mexican soccer league. Although originally MLS wanted Chivas in a market in which it wasn’t represented (most likely Houston), the club ended up in LA, renting the Home Depot Center (home of the Galaxy) from AEG. Just weeks into the 2005 season numerous cities - Cleveland, Seattle, Rochester, Oklahoma City/Tulsa, San Antonio, and Toronto - are vying for the next round of expansion. San Antonio has already begun a season ticket drive in order to meet one of the requirements to get an MLS team playing in the Alamodome by the 2006 season. The questions in all this flurry of action are ‘How is the league changing? Is this good, sustainable, and just the beginning?’ MLS is finally putting an emphasis on profit and sustainability. A main focus of the expansion criteria is the soccer specific stadium. With these stadiums, the teams have access to revenues from parking and concessions in addition to ticket sales, and could profit from event hosting, such as concerts. MLS is also exploiting advertising opportunities in an innovative way. Previously due to soccer’s lack of timeouts, commercials could only be played at half time, leaving 45 minutes of minimal advertising opportunity. During those 45 minutes sponsors names would be mentioned by commentators on air or be visible on wooden boards through the stadium. In its 10th season however, MLS games now have side by side commercials and game events during dead ball situations such as injuries. In terms of expansion teams, MLS is taking a big step in including foreign investors/owners. Additionally it is attempting to diversify ownership of the teams with the addition of Real Salt Lake and Chivas. The newest teams in consideration also would have new owners and not be an addition to the collection of current owners.The market for additional MLS teams looks good. According to American City Business Journal, which analyzed 172 markets across America to determine their economic ability to support additional professional teams in baseball, football, basketball, hockey and soccer in October of 2004: “Major League Soccer has the widest range of expansion or relocation options among the five big leagues, according to the resulting market capacity ratings. Eighty-two areas have scores of 100 for MLS, placing them above the league's minimum income threshold. The list of qualified sites for soccer ranges from Philadelphia to such unlikely choices as Shreveport, La., and Johnson City, TN.” Furthermore, American Sports Data indicates that total soccer participation in the U.S. is at nearly 18 million and soccer has been voted the hottest sport in the U.S. in each of the past five years by respondents to the SGMA International State of the Industry Survey.With the increasing success of US National teams on the world stage, consistently sold out Champions League events here in the US, an MLS team reaching three million fans on a Saturday night, and an increasing base of soccer knowledgeable Americans, the expansion of MLS into new markets is not only viable but crucial to the longevity of the league.

1 Comments:

We had the opportunity to ask Peter Wilt, the General Manager of the Chicago Fire, a few questions regarding MLS expansion. The questions and answers follow. We would like to thank Mr. Wilt for taking the time to comment.

-Jess Zysk

1. How fast will MLS continue to expand?

PJW: It's tbd as many variables including stabilizing existing teams, growing the pool of talented American players and developing beneficial business models with communities and ownership groups effect the rate of growth. I don't think it's unreasonable to project additional teams two, four and six years from now.

2. Will MLS continue to keep the requirements of a $10 million investor, pre season sales, and stadium plans for possible expansion teams?

PJW: This is a question for MLS, but it is safe to assume that MLS will continue to insist on proof of a strong foundation to grow a team. Significant financial backing, proof of community support and a viable business model are all relevant components of a strong foundation.

3. Aside from meeting aforementioned requirements, how does the MLS choose sites for expansion?

PJW: Again, this is really a question for MLS, but I will tell you that market size and demographics as well as competition for the entertainment dollar are all important. A large market can potentially attract more fans and more importantly, television viewers. A smaller market with less entertainment competition can provide more media support and be viewed as a better entertainment option. Markets with large recent immigrant populations from countrries that have strong soccer support are attractive as are markets with a high percentage of youth soccer participation.

4. How do you view the role of international investors? Will there be more and how does that change the league?

PJW: International investors are a positive to the dynamic of MLS' business. Increased numbers of potential investors for a limited supply of teams, drives up the value of the teams and the League. International investors generally have a good idea of the potential of the sport and have existing commitments in soccer and knowledge of the sport. Chivas USA is being viewed by many as a test. Their success would guarantee that others would like to follow. In the absence of success, it would not rule out further international investment. It would merely mean the other investors would feel they need to and could do it better.

5. Will MLS encourage new investors for the new teams and/or encourage current investors to sell teams so as to diversify ownership within the league?

PJW: Yes. It is understood that the League needs diversity in its ownership group in order to provide a broader ownership base. Both AEG and HSG are in the midst of strategically divesting a portion of their MLS holdings in order to provide greater balance and future economic stability to the League.

6. With the new methodology of side by side play and commercials can MLS earn more revenue from advertisers or is the audience still too ‘small’?

PJW: Side x side commercials adds more inventory to telecasts and increases the potential for advertising dollars. This change provides minimal improvement of gross broadcast revenue. Major improvements in broadcast revenue will not occur until the television audience for MLS grows significantly. That will occur over time with the growth of the size of the League (from 12 to 18 markets) and the growth in the interest in the League.

7. How long do you think the league can go on in the red?

PJW: The ownership in MLS has the financial ability to operate in the red forever. More relevant is their desire to operate in the red if growth stagnates. Real signs of growth have been realized in the last several years and if that trend continues, there will be no withdrawal from the ownership group irregardless of operational deficits.

8. What do you see as the 2 main issues/problems the MLS is currently facing?

PJW: 1) the need to become more relevant to the soccer community. We need more people to care about our players, teams and League. More people must have an emotional connection with MLS teams. We are doing a very good job selling tickets. We need to do a better job convincing people they should care about the players, teams and League.2) the need to develop more appropriately sized venues that allows ownership to control revenue streams, scheduling and non-soccer programming. No other major league sport has its teams playing in faclities that are not appropriately sized or controlled by the teams' owners.

9. What do you see as the ultimate (future) position of the MLS?

PJW: MLS should be the dominant soccer league in the western hemisphere and one of the premier sports leagues in the western hemisphere. I could also envision a merger with the Mexican Football League creating a first and second division, with promotion and relegation and a move to a fall/winter/spring schedule.